Direct Investment in China

1. Selecting the investment method

Investors looking to invest in China directly have a range of methods to choose from, including incorporating a joint venture with a Chinese company and incorporating a solely owned company (a company funded only with foreign capital). When choosing from among these methods, the first issue to consider is whether the desired field for investment is subject to restrictions or prohibitions on investment by foreign companies. In China, investment is promoted, permitted, restricted or prohibited according to the classification of the relevant field, and a particular field may be subject to limitations, such as prohibitions against investment by foreign companies, requirements that foreign investment be made by forming a joint venture with a Chinese company, or requirements that the Chinese partners have the majority shareholding in the joint venture.

Even if there are no problems with the classification of the field, investors must select the most suitable investment method for their unique case.

2. Acquisition of Chinese companies

Another possible method of direct investment in China is by acquiring an existing Chinese company. Using this method allows investors to make use of the operational structure already established by the target Chinese company, increasing the investors’ chances of expanding the business according to their vision straight away after investing. Nevertheless, to expand the business according to the investors’ vision, it is essential to perform appropriate investigations (such as legal and financial due diligence) of the target Chinese company to check whether the target company has not been conducting its business in breach of laws and confirm the financial standing and other aspects of the target company. Further, when a foreign company acquires a Chinese company, the same limitations and procedures under the investment field classifications apply, in the same way as if the foreign company had established a new Chinese company.

3. Operation, reorganization, dissolution, liquidation and bankruptcy of Chinese subsidiaries

Even if investors incorporate a joint venture or other company in China, if the company is not properly operated after its incorporation, the investment will be meaningless. For example, for the successful operation of a joint venture company, it is necessary to operate the company to maximize the investors’ profits while maintaining a cooperative relationship with the partner Chinese company, and if the Chinese company is responsible for the day-to-day management and administration of the joint venture, proper supervision of the Chinese company’s management and administration is required.

Further, mergers, divisions and other reorganizations of companies established in China may become necessary.

In addition, if the company incorporated in China does not create revenue as initially expected or in other similar circumstances, the investors may be forced to dissolve or liquidate the company that they established in China and downscale or withdraw from their business in China, in accordance with Chinese laws. Alternatively, if the incorporated company falls into the circumstances set forth in China’s Enterprise Bankruptcy Law (it is unable to repay its debts that have fallen due and its assets are insufficient to repay all of the debts, or its capacity to repay is clearly lacking), the company may be required to liquidate due to bankruptcy following the procedures set out in the Enterprise Bankruptcy Law.

4. Services provided by Kuroda Law Offices

We have worked on a large number of direct investment cases involving China and can provide services for all aspects, including advancing into China, operation of subsidiaries in China and withdrawal from China. Further, we can handle all or part of the procedures required by Chinese authorities on our clients’ behalf, from drafting the necessary documents to submitting them to the authorities.

The major services we provide in relation to direct investment in China include: